IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/127532.html
   My bibliography  Save this paper

Motivational investments and financial incentives

Author

Listed:
  • Ghatak, Maitreesh
  • Wahhaj, Zaki

Abstract

If firms can invest in the motivation of workers to undertake costly effort, how does that affect the choice of explicit financial incentives? We develop a simple principal–agent model where the standard optimal contract is to offer a bonus that trades off incentive provision versus rent extraction. We allow the principal to undertake two types of motivational investments—one that increases the agent’s disutility from deviating from a prescribed effort level, and another that reduces the cost of effort. We refer to these as guilt and inspiration, respectively. We characterize the conditions under which motivational investments and financial incentives are substitutes and complements, and find that it depends on the type of the investment as well as whether the worker’s participation constraint is binding.

Suggested Citation

  • Ghatak, Maitreesh & Wahhaj, Zaki, 2025. "Motivational investments and financial incentives," LSE Research Online Documents on Economics 127532, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:127532
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/127532/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Imran Rasul & Daniel Rogger, 2018. "Management of Bureaucrats and Public Service Delivery: Evidence from the Nigerian Civil Service," Economic Journal, Royal Economic Society, vol. 128(608), pages 413-446, February.
    2. Michael Kosfeld & Susanne Neckermann & Xiaolan Yang, 2017. "The Effects Of Financial And Recognition Incentives Across Work Contexts: The Role Of Meaning," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 237-247, January.
    3. Kvaløy, Ola & Nieken, Petra & Schöttner, Anja, 2015. "Hidden benefits of reward: A field experiment on motivation and monetary incentives," European Economic Review, Elsevier, vol. 76(C), pages 188-199.
    4. Nava Ashraf & Oriana Bandiera & Edward Davenport & Scott S. Lee, 2020. "Losing Prosociality in the Quest for Talent? Sorting, Selection, and Productivity in the Delivery of Public Services," American Economic Review, American Economic Association, vol. 110(5), pages 1355-1394, May.
    5. Imran Rasul & Daniel Rogger, 2018. "Management of Bureaucrats and Public Service Delivery: Evidence from the Nigerian Civil Service," Economic Journal, Royal Economic Society, vol. 128(608), pages 413-446, February.
    6. Abhijit V. Banerjee & Paul J. Gertler & Maitreesh Ghatak, 2002. "Empowerment and Efficiency: Tenancy Reform in West Bengal," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 239-280, April.
    7. Tore Ellingsen & Magnus Johannesson, 2008. "Pride and Prejudice: The Human Side of Incentive Theory," American Economic Review, American Economic Association, vol. 98(3), pages 990-1008, June.
    8. Ashraf, Nava & Bandiera, Oriana & Jack, B. Kelsey, 2014. "No margin, no mission? A field experiment on incentives for public service delivery," Journal of Public Economics, Elsevier, vol. 120(C), pages 1-17.
    9. Lea Cassar & Stephan Meier, 2018. "Nonmonetary Incentives and the Implications of Work as a Source of Meaning," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 215-238, Summer.
    10. Timothy Besley & Maitreesh Ghatak, 2017. "Profit with Purpose? A Theory of Social Enterprise," American Economic Journal: Economic Policy, American Economic Association, vol. 9(3), pages 19-58, August.
    11. Erika Deserranno, 2019. "Financial Incentives as Signals: Experimental Evidence from the Recruitment of Village Promoters in Uganda," American Economic Journal: Applied Economics, American Economic Association, vol. 11(1), pages 277-317, January.
    12. Karthik Muralidharan & Venkatesh Sundararaman, 2011. "Teacher Performance Pay: Experimental Evidence from India," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 39-77.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. De La O, Ana L. & González, Lucas I. & Weitz-Shapiro, Rebecca, 2023. "Voluntary audits: Experimental evidence on a new approach to monitoring front-line bureaucrats," World Development, Elsevier, vol. 162(C).
    2. Non, Arjan & Rohde, Ingrid & de Grip, Andries & Dohmen, Thomas, 2022. "Mission of the company, prosocial attitudes and job preferences: A discrete choice experiment," Labour Economics, Elsevier, vol. 74(C).
    3. Harris, Donna & Borcan , Oana & Serra, Danila & Telli, Henry & Schettini, Bruno & Dercon, Stefan, 2024. "Proud to Belong: The Impact of Ethics Training on Police Officers in Ghana," CEPR Discussion Papers 19141, C.E.P.R. Discussion Papers.
    4. Gauri, Varun & Jamison, Julian C. & Mazar, Nina & Ozier, Owen, 2021. "Motivating bureaucrats through social recognition: External validity—A tale of two states," Organizational Behavior and Human Decision Processes, Elsevier, vol. 163(C), pages 117-131.
    5. Theodor Vladasel & Simon C. Parker & Randolph Sloof & Mirjam van Praag, 2024. "Revenue drift, incentives, and effort allocation in social enterprises," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 33(3), pages 630-651, August.
    6. Kalaj, Jozefina & Rogger, Daniel & Somani, Ravi, 2022. "Bureaucrat time-use: Evidence from a survey experiment," World Development, Elsevier, vol. 152(C).
    7. Armouti-Hansen, Jesper & Cassar, Lea & Deréky, Anna & Engl, Florian, 2024. "Efficiency wages with motivated agents," Games and Economic Behavior, Elsevier, vol. 145(C), pages 66-83.
    8. Donna Harris & Oana Borcan & Danila Serra & Henry Telli & Bruno Schettini & Stefan Dercon, 2022. "Proud to belong: The impact of ethics training on police officers," CSAE Working Paper Series 2022-05, Centre for the Study of African Economies, University of Oxford.
    9. Liu, Kevin Zhengcheng & Zhang, Xiaoming, 2025. "Discretion, talent allocation, and governance performance: Evidence from China’s imperial bureaucracy," Journal of Development Economics, Elsevier, vol. 172(C).
    10. Ghatak, Maitreesh & Wahhaj, Zaki, 2020. "Guilt, Esteem, and Motivational Investments," CEPR Discussion Papers 15172, C.E.P.R. Discussion Papers.
    11. Tukiainen, Janne & Blesse, Sebastian & Bohne, Albrecht & Giuffrida, Leonardo M. & Jääskeläinen, Jan & Luukinen, Ari & Sieppi, Antti, 2024. "What are the priorities of bureaucrats? Evidence from conjoint experiments with procurement officials," Journal of Economic Behavior & Organization, Elsevier, vol. 227(C).
    12. Jones, Daniel B. & Tonin, Mirco & Vlassopoulos, Michael & Winichakul, K. Pun, 2023. "Paying for what kind of performance? Performance pay, multitasking, and sorting in mission-oriented jobs," Games and Economic Behavior, Elsevier, vol. 142(C), pages 480-507.
    13. Callen, Michael & Gulzar, Saad & Hasanain, Ali & Khan, Muhammad Yasir & Rezaee, Arman, 2023. "The political economy of public sector absence," Journal of Public Economics, Elsevier, vol. 218(C).
    14. Alain de Janvry & Guojun He & Elisabeth Sadoulet & Shaoda Wang & Qiong Zhang, 2020. "Performance Evaluation, Influence Activities, and Bureaucratic Work Behavior: Evidence from China," HKUST CEP Working Papers Series 202003, HKUST Center for Economic Policy.
    15. Amodio, Francesco & Choi, Jieun & De Giorgi, Giacomo & Rahman, Aminur, 2022. "Bribes vs. taxes: Market structure and incentives," Journal of Comparative Economics, Elsevier, vol. 50(2), pages 435-453.
    16. Bigoni, Maria & Ploner, Matteo & Vu, Thi-Thanh-Tam, 2023. "The right person for the right job: workers’ prosociality as a screening device," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 53-73.
    17. Aisha J Ali & Javier Fuenzalida & Margarita Gómez & Martin J Williams, 2021. "Four lenses on people management in the public sector: an evidence review and synthesis," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 37(2), pages 335-366.
    18. Ina Ganguli & Marieke Huysentruyt & Chloé Le Coq, 2021. "How Do Nascent Social Entrepreneurs Respond to Rewards? A Field Experiment on Motivations in a Grant Competition," Management Science, INFORMS, vol. 67(10), pages 6294-6316, October.
    19. Ruben Enikolopov, 2011. "Are Bureaucrats Really Paid Like Bureaucrats?," Working Papers w0165, Center for Economic and Financial Research (CEFIR).
    20. Guido Friebel & Matthias Heinz & Mitchell Hoffman & Nick Zubanov, 2023. "What Do Employee Referral Programs Do? Measuring the Direct and Overall Effects of a Management Practice," Journal of Political Economy, University of Chicago Press, vol. 131(3), pages 633-686.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:127532. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.